Preliminary Results

RNS Number : 7324Y

Quadnetics Group PLC

09 September 2009

 



For immediate release

9 September 2009

Quadnetics Group plc

Preliminary Results for the year ended 31 May 2009

Quadnetics Group plc, a leader in the development, design, integration and management of advanced surveillance technology and security networks, reports its preliminary results for the year ended 31 May 2009.

Highlights

·	Revenue £70.7 million (2008: £79.2 million)
·	Underlying profit* before tax £1.8 million (2008: £3.7 million), after charging £1.6 million of costs related to new products (2008: £0.1 million)
·	Profit before tax £0.5 million (2008: £4.4 million)
·	Underlying EPS** 8.2p (2008: 18.9p)
·	Basic EPS 1.7p (2008: 21.6p)
·	Recurring revenue £16.3 million (2008: £14.1 million)
·	Proposed final dividend 4.5p per share making 7.0p for the full year (2008: 7.0p)
·	Significant initial sales of new Synectics products
·	Net cash at 31 May 2009 £8.1 million (2008: £7.9 million)
·	Group restructuring well under way

* Underlying profit represents profit before tax, exceptional items, goodwill reduction and share-based payments charge/(credit). **Underlying earnings per Ordinary share is based on profit after tax but before exceptional items, goodwill reduction and share-based payments charge/(credit).

Commenting on the results, John Shepherd, Chief Executive, said:  

'Trading for the year as a whole was difficult in comparison to the previous year especially in the first half. It is especially pleasing to have delivered the stronger second half performance as predicted in February without cutting back on our investment in new product development - the lifeblood of future growth.

'Since joining the Group in November I have begun a programme of transition which is aimed at responding to and capitalising on the current global economic turmoil through focusing the business on defendable higher margin market niches. The first phase of the transition process, which includes significant investment in senior management talent, structural reorganisation, site consolidation and regional expansion, is now well underway. It will take a further six to twelve months before we begin to see the fruits of this investment. The global security and surveillance market is still growing and the supply base is fragmented - a situation which presents many exciting opportunities for the Group.'

For further information, please contact:

Quadnetics Group plc	Tel: [phone]
John Shepherd, Chief Executive
Email: [e-mail]	www.quadnetics.com

Brewin Dolphin Investment Banking	Tel: [phone]
Neil Baldwin

Media enquiries: 

Buchanan Communications Limited	Tel: [phone]
Tim Anderson, Isabel Podda, Ben Romney, Katharine Sutton	Email: [e-mail]

  Chairman's Statement

Introduction

I am pleased to report that, after a weak first half, Quadnetics produced a significantly stronger underlying operating performance in the second half of 2008/9 as anticipated in the Company's interim statement. Nevertheless, results continued to be patchy across the various security and surveillance markets Quadnetics serves, with some areas seemingly more affected than others by the downturn of the past year or so. In particular, the gaming market in North America was subject to a sharp decline as projects for systems upgrades suffered lengthy delays, whereas Synectics Networks' products and systems in all other regions produced good revenue and profits growth.

2008/9 was also a year of investment for Quadnetics, both in a new Group technology platform, and in establishing a more integrated operating structure. Firstly, we brought to market our suite of new H.264 digital surveillance products. The net cost of development of these products charged to the income statement in 2008/9 was £1.6 million (2008: £88,000). Secondly, we began during the year a substantial reorganisation of the Group's operating and management structure to consolidate and further integrate our activities and so enable greater focus on specific core customer groups, and greater efficiencies of operating scale. We expect the benefits of these actions to become apparent in the second half of the 2009/10 financial year.

Results

In the year to 31 May 2009, Quadnetics recorded underlying profit (that is, profit before tax, exceptional costs, goodwill reduction and share-based payment costs) of £1.8 million (2008: £3.7 million) on revenue of £70.7 million (2008: £79.2 million). The primary reasons for the decreases in both revenue and operating margin are set out in the business review below. Profit before tax was £0.5 million (2008: £4.4 million), after charging £1.35 million of exceptional costs related to the restructuring referred to above.  

Sales in the nature of recurring revenue, primarily maintenance and managed services, are a key measure targeted by the Group. These grew by just over 15% to £16.3 million.

Underlying earnings per share were 8.2p (2008: 18.9p).

The Group's balance sheet remained ungeared, with net cash at 31 May 2009 of £8.1 million (2008: £7.9 million). Free cash flow, that is cash inflow from operations (excluding exceptional payments) less capital expenditure, was £1.9 million (2008: £2.5 million).

Dividend

The Board is proposing a final dividend of 4.5p (2008: 4.5p) payable on 4 December 2009 to shareholders on the register on 6 November 2009. If approved by shareholders, this would bring the total dividend for the full year to 7.0p (2008: 7.0p). The proposal of an unchanged dividend reflects both our strong balance sheet and, more importantly, the Board's confidence in the prospects of the Group.

Business Review

Quadrant Security

The Group's security services division, providing integrated security systems, security management support and mobile surveillance services

Revenue	£52 million
Operating Profit	£3.6 million

Quadrant Security Group ('QSG') achieved a small overall increase in operating profit to £3.6 million (2008: £3.5 million), on revenue that declined by 10% to £52.0 million (2008: £57.9 million). The major part of the decline in turnover came from a decrease in low margin pass-through revenue within its security management activities. Although the overall profit result for the division was around 10% below the Board's initial expectations for the year, it was a creditable performance in light of a tough economic and competitive background in the UK.

The UK systems integration activities suffered from a substantial decline in anticipated business from both the UK banking sector and, the commercial high security market. Offsetting these declines, business remained stronger in the government public space and high security area and in the Middle East. 

The Group's on-vehicle CCTV activities produced a strong result, with further growth in revenue, profit and operating margin in the year. In particular, the new Synectics mobile video recorder is offering unique advantages to customers that should solidify Quadnetics' position as the UK market leader in this sector. 

The retail security managed services activities performed above expectations, and are now well positioned for expansion into larger facilities management contracts with their customers.

Synectics

The Group's security technology division, providing security network products and software, hazardous area systems and defence surveillance technology

Revenue	£21 million
Operating Profit	£1.3 million

(before product development costs)

Synectics' revenue for the year was £21.5 million (2008: £23.1 million), on which the overall operating profit was £1.3 million (2008: £1.7 million), prior to charging costs associated with developing and bringing to market the new digital product suite. The most significant impact was a decline of 37% in revenue in the North American gaming market, after several years of consistently high organic growth. This appears to be a function of the general economic downturn, with projects delayed rather than lost or cancelled. Regulatory requirements should mean that the projects do happen over time, once an air of greater normality has returned. The North American activities were still profitable, but substantially less so than in the previous year.

The UK defence activities also suffered from reduced volumes during the year, and produced an unacceptable loss-making operating contribution. Reduction of the cost base in this area to align with the reduced activity levels has been addressed within the overall Group restructuring.

On the positive side, the Synectics Networks business outside North America recorded modest revenue growth compared with the previous year, as well as a substantial increase in operating margins as the benefit of increased sales led to improved efficiencies. The net result was very healthy and ahead of our expectations.

The Group's sales into the global oil & gas and marine markets grew appreciably and, more importantly, internal efficiency gains resulted in much improved operating margins. This was achieved through substantially better process management, as well as increased focus on cross-selling other products from within the Group. This is an example of the success of Synectics in leveraging its wider systems products into opportunities for growth in our established customer base, of which we expect to see much more as we go forward.

Revenues from Synectics' new H.264 products ramped up significantly in the second half, particularly in the mobile surveillance market where important sales gains were made in the UK bus and rail sector. The products include a range of digital video recorders and encoders that our customers tell us provide performance and, in particular, picture quality that are well ahead of competing offerings in the market. This is an example of the Group's strategy to develop proprietary core elements which, when combined with the best available third party system components as needed, provide differentiated integrated surveillance systems adapted to the needs of our specialist customers.

People

Last year was particularly difficult for our employees, given the amount of change they were asked to implement at the same time as responding to the increased pressures of unusually challenging markets. I would again like to pass on the Board's sincere thanks for the continuing commitment, creativity and good humour of all those who help to make Quadnetics what it is. 

As part of the process of recognising this commitment from our people, and ensuring that future performance is appropriately rewarded, the Board has recently put in place a revised share-based long term incentive plan for senior managers, and we will be introducing shortly a new all-employee share ownership plan.

During the year we have had a number of changes among the Company's executive Board members. In November John Shepherd was appointed Group Chief Executive. John brings with him an impressive track record of achieving growth in medium-to-large technology businesses in markets similar to those Quadnetics addresses, and the Group is already benefiting from his experience. Glenn Robinson, Technical Director, left the Group in March this year.

Russ Singleton, founder of Synectics and Chief Executive of Quadnetics from 2002, has become Strategic Development Director, with the key responsibility for technology, products and business development across the Group. Russ has been the vital inspiration in the growth and evolution of Quadnetics, and I am delighted he has decided to re-focus his unique skills in this way.

Strategy

At the time of his appointment, the Board asked John Shepherd to lead a thorough review of Quadnetics' strategy and objectives. The key conclusions from his review have re-affirmed our strategy of focussing on a small number of specialist security and surveillance end markets with complex or highly critical needs. We continue to believe that the growth potential in building on Quadnetics' positions in mobile, extreme environment and high security surveillance applications is very substantial. 

The changes John has introduced are centred on consolidating and further integrating the Group's operations, as well as strengthening the senior management team. The new structure was formally put in place on 1 June 2009, and the operational changes are being implemented progressively across the current financial year. We expect the benefits to be measurable in terms of larger contract wins, more predictability in sales and increased overall operating margins. The newly recruited members of our senior management team, Paul Moonan and Graham Jones, come with records of having successfully led and grown larger businesses, and we look forward to the added impetus they will bring to achieving our objectives.

Outlook

The general economic background Quadnetics is addressing continues to be difficult, particularly in areas involving discretionary capital spending. Our gaming, financial services and defence customer sectors remain subject to lengthened sales cycles and therefore lower current revenues. Other areas, in particular oil & gas and mobile surveillance, continue to hold up well. Overall, the firm order book at year end was relatively low at £17.2 million (2008: £22.5 million); the sales pipeline, however, has risen to record levels since that date.

Synectics new products are continuing to gain sales, and we expect a much improved contribution from that area in the financial year just started. The actions taken to reduce costs through consolidating similar activities in a reduced number of sites will also have a positive impact on margins from 2010 onwards. The actions initiated so far will, when fully implemented, result in annualised cost savings of approximately £1.8 million, as well as providing tighter operational control. Overheads have been increased in certain areas, notably senior operations management and sales resource in faster growing geographic regions.

The re-organisation and transition towards a more integrated structure initiated by our new Chief Executive are continuing and should be completed early in the second half of 2009/10. Combined with the still uncertain timing of large orders in several business areas, this will inevitably affect results in the short term, as costs are being incurred now to position the Group for economic recovery and future growth. Results for the first half of this financial year are therefore likely to be relatively weak, with again a much stronger second half expected. More fundamentally, the Board is confident that the increased senior management resources and more integrated organisation now in place give the Group the scalability to deliver consistent growth as we build on the strong market positions established over the past few years.

David Coghlan

Chairman

9 September 2009

Consolidated Income Statement For the year ended 31 May 2009
	Notes		2009		2008
			£'000		£'000
Revenue	2		70,655		79,174
Cost of sales			(50,881)		(57,849)
Gross profit			19,774		21,325
Operating expenses			(19,578)		(17,147)
Profit from operations
Excluding exceptional reorganisation costs, goodwill reduction and share-based payments	2		1,553		3,514
Exceptional reorganisation costs	3		(1,350)		-
Goodwill reduction in respect of tax losses	4		-		(141)
Share-based payments (charge)/credit	10		(7)		805
Total profit from operations			196		4,178
Finance income	5		552		459
Finance costs	6		(287)		(243)
Share of results of joint venture			10		-
Profit before tax
Excluding exceptional reorganisation costs, goodwill reduction and share-based payments			1,828		3,730
Exceptional reorganisation costs	3		(1,350)		-
Goodwill reduction in respect of tax losses	4		-		(141)
Share-based payments (charge)/credit	10		(7)		805
Total profit before tax			471		4,394
Income tax expense			(212)		(1,037)
Profit for the period attributable to equity holders of the parent			259		3,357
Basic and diluted earnings per Ordinary share	9		1.7p		21.6p

Consolidated Statement of Recognised Income and Expense

For the year ended 31 May 2009

			2009		2008
			£'000		£'000
Profit for the period			259		3,357
Exchange differences on translation of foreign operations			117		-
Total recognised income and expense for the period attributable to equity holders of the parent			376		3,357

Consolidated Balance Sheet As at 31 May 2009
	Notes		2009		2008
			£'000		£'000
Non-current assets
Property, plant and equipment			1,809		1,951
Intangible assets			17,903		17,938
Deferred tax asset			414		502
Investment in joint venture			55		-
			20,181		20,391
Current assets
Inventories			5,343		4,249
Trade and other receivables			22,503		29,502
Cash and cash equivalents			8,111		7,940
			35,957		41,691
Total assets			56,138		62,082
Current liabilities
Trade and other payables			(21,767)		(27,777)
Tax liabilities			(553)		(372)
Current provisions			(1,585)		(380)
			(23,905)		(28,529)
Non-current liabilities
Non-current provisions			(75)		(691)
			(75)		(691)
Total liabilities			(23,980)		(29,220)
Net assets			32,158		32,862
Equity attributable to equity holders of parent company
Called up share capital	11		3,382		3,382
Share premium account	11		14,851		14,851
Merger reserve	11		9,565		9,565
Other reserves	11		(2,486)		(2,486)
Currency translation reserve	11		104		(13)
Retained earnings	11		6,742		7,563
Total equity			32,158		32,862

Consolidated Cash Flow Statement For the year ended 31 May 2009
		2009		2008
		£'000		£'000
Cash flows from operating activities
Profit for the period		259		3,357
Income tax expense		212		1,037
Finance income		(552)		(459)
Finance costs		287		243
Depreciation and amortisation charge		1,139		611
Goodwill reduction in respect of tax losses		-		141
Loss on disposal of non-current assets		51		13
Share-based payments charge/(credit)		7		(805)
Operating cash flows before movement in working capital		1,403		4,138
(Increase)/decrease in inventories		(1,067)		825
Decrease/(increase) in receivables		7,617		(9,057)
(Decrease)/increase in payables and provisions		(5,973)		8,813
Cash generated from operations		1,980		4,719
Interest received		281		249
Tax received/(paid)		56		(1,368)
Net cash from operating activities		2,317		3,600
Cash flows from investing activities
Purchase of property, plant and equipment		(460)		(892)
Sale of property, plant and equipment		46		52
Capitalised development costs		(174)		(1,132)
Purchased software		(68)		(236)
Sale of property held for resale		-		2,060
Deferred consideration on acquisition made in 2005		(382)		(99)
Investment in joint venture		(45)		-
Net cash used in investing activities		(1,083)		(247)
Cash flows from financing activities
Interest paid		(11)		-
Dividends paid		(1,087)		(1,009)
Net cash used in financing activities		(1,098)		(1,009)
Effect of exchange rate changes on cash and cash equivalents		35		-
Net increase in cash and cash equivalents		171		2,344
Cash and cash equivalents at the beginning of the period		7,940		5,596
Cash and cash equivalents at the end of the period		8,111		7,940

Notes to the Consolidated Financial Statements

For the year ended 31 May 2009

1. Basis of preparation

The information contained within this Preliminary Announcement has been extracted from the financial statements which have been prepared in accordance with IFRS as adopted by the European Union ('adopted IFRS'), and with those parts of the Companies Act 2006 applicable to companies reporting under adopted IFRS. They have been prepared using the historical cost convention except where the measurement of balances at fair value is required.

2. Segmental analysis

Revenue and underlying profit from operations (operating profit before exceptional costs, goodwill reduction and share-based payments charge/(credit)), derives from the Group's two operating segments as follows:

	2009 £'000	2008 £'000
Revenue
Services	51,969	57,920
Products and software	21,490	23,140
Intra-group sales	(2,804)	(1,886)
	70,655	79,174
Underlying profit from operations
Services	3,605	3,545
Products and software	(235)	1,584
Central costs	(1,817)	(1,615)
	1,553	3,514

3. Exceptional reorganisation costs

	2009 £'000		2008 £'000
Reorganisation costs	1,350		-

Following the strategic review announced in February 2009, reorganisation costs of £1,350,000 have been expensed in the period, and primarily relate to redundancy and related costs (£895,000), and costs of rationalising certain properties (£455,000). 

4. Goodwill Reduction in respect of tax losses

The Goodwill reduction in respect of tax losses in 2008 arises as a result of the recognition of tax losses that were not originally included in the acquisition balance sheet of Protec plc in November 2005.

5. Finance income

	2009 £'000		2008 £'000
Bank interest receivable	157		218
Expected return on pension scheme assets	276		241
Interest receivable from HMRC on tax repayments	119		-
	552		459

6. Finance costs

	2009 £'000		2008 £'000
Interest payable on bank overdrafts	5		2
Other interest payable	6		-
Interest on pension scheme liabilities	276		241
	287		243

7. Taxation

Tax charge	2009 £'000		2008 £'000
Current taxation:
UK tax	250		525
Overseas tax	19		423
Adjustments in respect of prior years	(154)		(278)
Total current tax	115		670
Deferred taxation:
Origination and reversal of timing differences	204		532
Adjustments in respect of prior years	(107)		(165)
Total deferred tax	97		367
	212		1,037

Reconciliation of tax charge for the year

The corporation tax assessed for the year differs from the standard rate of corporation tax in the UK of 28% (2008: 29.7%). The differences are explained below:

	2009 £'000		2008 £'000
Profit on ordinary activities before tax	471		4,394
Tax on profit on ordinary activities before tax at standard rate of 28% (2008: 29.7%)	132		1,304
Effects of:
Expenses not deductible for tax purposes and timing differences	155		231
Other timing differences	(54)		(72)
US profits taxed at higher rate	7		82
Goodwill reduction not qualifying for tax relief	-		42
Utilisation of tax losses	-		(146)
Release of deferred tax asset	233		-
Rate change on deferred tax balance	-		39
Adjustment in respect of prior years	(261)		(443)
Total tax charge for the year	212		1,037

The Group has tax losses available to be carried forward for offset against the future taxable profits of certain Group companies amounting to approximately £1.5 million (2008: £1.3 million). A deferred tax asset in respect of these losses, amounting to £0.2 million (2008: £0.4 million), has been recognised at the year end as the Group believes that there will be future taxable profits against which the losses will be relieved.

8. Dividends

The Directors recommend the payment of a final dividend of 4.5p per share totalling £782,000, and subject to approval, this is expected to be paid on 4 December 2009 to shareholders on the register at 6 November 2009. This will give a total dividend for the year of 7.0p (2008: 7.0p).

9. Earnings per Ordinary share

	2009 p per share		2008 p per share
Basic and diluted earnings per Ordinary share	1.7		21.6
Underlying basic and diluted earnings per Ordinary share	8.2		18.9

Basic and diluted earnings per Ordinary share

The calculation of basic earnings per Ordinary share is based on the profit after taxation for the year of £259,000 (2008: £3,357,000) and on 15,528,934 shares, being the weighted average number of shares in issue and ranking for dividend during the year (2008: 15,528,934).

The calculation of diluted earnings per Ordinary share is based on the profit after taxation for the year of £259,000 (2008: £3,357,000) and on 15,528,934 shares, being the weighted average number of shares that would be in issue after conversion of all the dilutive potential Ordinary shares into Ordinary shares (2008: 15,535,537).

	Profit after tax £'000		Weighted average number of Ordinary shares		Earnings per Ordinary share p per share
Year ended 31 May 2009
Basic earnings per Ordinary share	259		15,528,934		1.7
Dilutive potential Ordinary shares arising from share options	-		-		-
Diluted earnings per Ordinary share	259		15,528,934		1.7
Year ended 31 May 2008
Basic earnings per Ordinary share	3,357		15,528,934		21.6
Dilutive potential Ordinary shares arising from share options	-		6,603		-
Diluted earnings per Ordinary share	3,357		15,535,537		21.6

Underlying basic and diluted earnings per Ordinary share

The calculation of underlying basic earnings per Ordinary share, which the Directors consider gives a useful additional indication of the underlying performance of the Group, is based on the profit after taxation for the year, but before deducting exceptional items, goodwill reduction and share-based payments charge/(credit) (net of tax) of £1,272,000 (2008: £2,942,000) and on 15,528,934 shares, being the weighted average number of shares in issue and ranking for dividend during the year (2008: 15,528,934).

	Profit after tax £'000		Weighted average number of Ordinary shares		Earnings per Ordinary share p per share
Year ended 31 May 2009
Basic earnings per Ordinary share	259		15,528,934		1.7
Exceptional items	1,350		-		8.7
Impact of exceptional items on tax charge for the year	(342)		-		(2.2)
Share-based payments charge	7		-		-
Impact of share-based payments charge on tax charge for the year	(2)		-		-
Underlying basic earnings per Ordinary share	1,272		15,528,934		8.2
Year ended 31 May 2008
Basic earnings per Ordinary share	3,357		15,528,934		21.6
Goodwill reduction	141		-		0.9
Share-based payments credit	(805)		-		(5.2)
Impact of share-based payments credit on tax charge for the year	249		-		1.6
Underlying basic earnings per Ordinary share	2,942		15,528,934		18.9

The calculation of underlying diluted earnings per Ordinary share is based on the profit after taxation for the year, but before deducting exceptional items, goodwill reduction and share-based payments charge/(credit) (net of tax) of £1,272,000 (2008: £2,942,000) and on 15,528,934 shares being the weighted average number of shares that would be in issue after conversion of all the dilutive potential Ordinary shares into Ordinary shares (2008: 15,535,537).

			Profit after tax £'000		Weighted average number of Ordinary shares		Earnings per Ordinary share p per share
Year ended 31 May 2009
Underlying earnings per Ordinary share			1,272		15,528,934		8.2
Dilutive potential Ordinary shares arising from share options			-		-		-
Underlying diluted earnings per Ordinary share			1,272		15,528,934		8.2
Year ended 31 May 2008
Underlying earnings per Ordinary share			2,942		15,528,934		18.9
Dilutive potential Ordinary shares arising from share options			-		6,603		-
Underlying diluted earnings per Ordinary share			2,942		15,535,537		18.9

  10. Share based payment charge/(credit)

The fair value of services received in return for share options granted or awards made under the Group's share schemes are measured by reference to the fair value of the share options granted or share scheme shares awarded.

The total charge/(credit) recognised for the year arising from share-based payments are as follows:

	2009 £'000		2008  £'000
Equity-settled share-based payments	7		25
Cash-settled share-based payments	-		(830)
	7		(805)

11. Reconciliation of movements in total equity

	Called up share capital £'000	Share premium account £'000	Merger reserve £'000	Other reserves £'000	Currency translation reserve £'000	Retained earnings £'000	Total £'000
At 1 June 2008	3,382	14,851	9,565	(2,486)	(13)	7,563	32,862
Profit after tax for the year	-	-	-	--	-	259	259
Dividends paid (note 8)	-	-	-	-	-	(1,087)	(1,087)
Credit in relation to share-based payments	-	-	-	-		7	7
Currency translation adjustment	-	-	-	-	117	-	117
At 31 May 2009	3,382	14,851	9,565	(2,486)	104	6,742	32,158

12. Full financial statements

The auditors have issued an unqualified opinion on the full financial statements which will be distributed to shareholders and delivered to the Registrar of Companies in due course. The financial information for 2008 does not comprise statutory financial statements. Statutory financial statements for 2008, on which the auditors gave an unqualified opinion, have been delivered to the Registrar of Companies. Further copies of these preliminary results will be available at the Company's registered office: Quadnetics Group plc, Haydon House, 5 Alcester Road, Studley, Warwickshire, B80 7AN or on the Company website at www.quadnetics.com. 

- Ends -

 

END

 

 

FR EAKNPELANEFE